Moody's Threaten US

DEBT CEILING: Moody's Just Threatened To Slash The US Credit Rating

Finally, a logical warning on US credit.

Moody's is out with a comment saying that if there's no imminent progress on the debt ceiling fight, the US credit rating will be cut.

This makes total sense, and we applaud Moody's for doing their job: Identifying an imminent (real) issue, and sensibly advising (ahead of time) about what could be a threat to US debt holders.

This should help put an end to this idea that a technical default would be just fine, and that somehow all this brinksmanship would be good for US credit somehow.

Back in January, we called on Moody's to do exactly this: Threaten a ratings cut as a way of warning about the harmful effects of this fight.

They've done exactly that.

The Most Important Line In Moody's Big Credit Warning On The US

Today Moody's warned that if the debt ceiling negotiations drag much further into the summer, it would have to put the US credit rating on review for a downgrade.

The full note is here.

This is probably the most important point in it:

2) If a debt-ceiling-related default were to occur, Moody's would likely downgrade the rating shortly thereafter. The extent of and length of time before a downgrade would depend on how factors surrounding the default affect the government's fundamental creditworthiness, including (a) the speed at which the default were cured, (b) an assessment of the effect of the default on long-term Treasury borrowing costs, and (c) measures put in place to prevent a recurrence. However, a rating in the Aa range would be the most likely outcome. Any loss to bondholders would likely be minimal or non-existent, as Moody's anticipates that a default would be cured quickly.

The bottom line: There is no such thing as a technical default. A default would kill the US AAA rating just like that.

Given that there's been a growing chorus of people who are attempting to minimize the significance of a "technical default", this is a huge point they've just clarified.

Hold On! It Looks Like The Moody's US Downgrade Warning Is Already Backfiring

The message from Moody's today was pretty straightforward: Come on guys, get your stuff together, stop it with the brinksmanship, and pass the debt ceiling. If you don't, goodbye AAA.

It was a message aimed right at politicians, but obviously politicians aren't going to let a ratings agency derail their agenda. So instead the message is already being twisted.

Congressmen are already blasting out their responses.

For example, this:

U.S. Congressman Kevin Brady, the top Republican on the Joint Economic Committee, released the following in response to Moody's statement:

"It is no idle threat that Americans faces a credit rating downgrade if the President and Congress don't act quickly to get our country's fiscal house in order.

"According to Moody's, the right path forward includes 'meaningful progress toward substantial and credible long-term deficit reduction.'  As a recent Joint Economic Committee Study points out, reducing government spending and debt grows economies. As we've seen in recent years, deficit spending and quantitative easing holds back economic growth."

Eh, Moody's didn't exactly threaten a downgrade if Washington didn't quickly get its house in order. It threatened a downgrade if the debt ceiling wasn't raised. Yes, Moody's also said that reforms needed to be made, but that wasn't the thrust of it.

So what we're getting is the same response as when S&P made a warning: Both sides are just digging in. As one Hill source put it: Geithner keeps insisting on his line, while the Freshmen stick to their "hell no" line.

In a Tweet, GOP Congressman Joe Walsh said: "Just spent 30min w/ Geithner and I'm disgusted and discouraged. We can't roll over & settle the way he wants us to. America deserve better."

Disgusted? Yes, so much for everyone coming together.